Internal Rate of Return (IRR) Calculator
Calculate the annualized profitability of investments with the IRR algorithm. Create cash flow tables, finding the break-even discount rate.
Cash Flow Schedule
About
The Internal Rate of Return (IRR) is one of the most widely used metrics in corporate finance and real estate to estimate the profitability of potential investments. Technically, it is the discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero.
Investors use IRR to compare projects with different lifespans and capital requirements. If the IRR exceeds the company's required rate of return (or hurdle rate), the project is generally considered desirable. Unlike simple ROI, IRR accounts for the 'time value of money,' recognizing that a dollar received today is worth more than a dollar received five years from now due to its potential earning capacity.
Formulas
The IRR is found by solving the following equation for r:
Where CFt is the cash flow at time t, and r is the internal rate of return. Since this equation cannot be solved algebraically for higher-order polynomials, a numerical method like Newton-Raphson is required.
Reference Data
| Investment Type | Typical IRR Target | Risk Level | Time Horizon |
|---|---|---|---|
| Core Real Estate | 7% - 10% | Low | 10+ Years |
| Value-Add Real Estate | 11% - 15% | Medium | 3-7 Years |
| Private Equity | 20% - 25% | High | 5-7 Years |
| Venture Capital | 30% + | Very High | 5-10 Years |
| S&P 500 (Historical) | ~10% | Medium | Indefinite |
| Government Bonds | 2% - 5% | Very Low | Fixed Term |
| Infrastructure | 8% - 12% | Low-Medium | 20+ Years |
| Distressed Debt | 15% - 20% | High | 2-5 Years |